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Partial Labour Market Reform Is Bad News For The Young And The Unemployed

Several European countries have chosen to introduce more flexibility to their labour markets by allowing employers to use temporary contracts. But according to new research by Professor Olivier Blanchard and Augustin Landier, published in the latest issue of the Economic Journal, the introduction of temporary contracts appears to have had perverse effects, decreasing the welfare of those it was supposed to help, namely the young and the unemployed.

Temporary contracts are not subject to the high ”firing costs” of permanent contracts. In France, for example, firms now can, under some conditions, hire workers for a fixed duration, at the end of which separation occurs with low costs for the employer. But if workers are kept beyond this fixed duration, later separation becomes subject to normal firing costs.

The researchers explore how the coexistence of these two types of contracts might affect hirings, separations and wages in the labour market. They argue that contrary to its initial purpose, this type of reform may be detrimental to the welfare of new entrants and unemployed workers.

The reason is simple. Temporary contracts make it more attractive for employers to hire. But when temporary contracts come to an end, the difference between firing costs for permanent contracts and for temporary contracts make it more attractive for employers to hire a new worker rather than give a permanent contract to the existing worker.

The result may well be an increase in turnover of workers, an increase in the time it takes to find stable employment and a decrease in welfare for new entrants to the labour force and the unemployed.

The researchers then turn to the evidence, examining the experience of France, where the proportion of temporary contracts in salaried employment has increased from 1.4% in 1983 to 10.8% in 2000.

Using panel data and focusing on the young (20-24), they find that the reforms have been associated with a substantial increase in turnover, and an increase in the time it takes for entrants to find permanent unemployment. In short, the introduction of temporary contracts appears to have had perverse effects, decreasing the welfare of those it was supposed to help, namely the young and the unemployed.

”The Perverse Effects of Partial Labour Market Reform: Fixed-term Contracts in France” by Olivier Blanchard and Augustin Landier is published in the June 2002 issue of the Economic Journal as part of a symposium on temporary work. The authors are at the Massachusetts Institute of Technology.